Charting the Course: A Systematic Exploration of Influences Shaping Money Market Fund Growth

Daniel Hiltgen

Abstract:

During times of market turmoil and volatility, investors – particularly institutional investors – tend to shift their investments to money market funds (MMFs) investing in U.S. government securities, as they consider government MMFs to be a low-risk investment. As a result, growth of the MMF industry from $2.2 trillion to $6.2 trillion over the last two decades has been driven by inflows into government MMFs. In contrast, since the peak of the 2008 financial crisis, prime and tax-exempt money market funds combined have declined in dollars by 30% in part due to both crises and regulatory reforms.

This report explores the influences that have shaped growth in MMFs using data from multiple sources, including the Commission’s Form N-MFP.^[1] The report analyzes a spectrum of factors, including past crises, regulatory reforms, Federal Reserve policies, advances from the Federal Home Loan Banks (FHLBs), and the effects of similar investments that investors may consider to be substitutes to MMFs. This report analyzes the intricate interplay between these influences and their respective impacts on historical MMF growth dynamics. Notably, the empirical findings reveal the predominant influence of the federal funds rate in driving long-term growth. In addition, during the 2023 banking crisis around 40% of the withdrawn deposits were effectively returned to banks. This is because the withdrawn deposits were deposited into MMFs which, in turn, purchased additional FHLB securities and thereby facilitated additional FHLB lending to banks. By offering comprehensive insights into these dynamics, this report provides a valuable resource for stakeholders seeking to navigate the intricacies of the MMF landscape.

[1] Unless stated otherwise, this report uses public data from Form N-MFP, which MMFs use to report information to the Commission each month about their portfolio holdings, under the Investment Company Act of 1940.